01 Apr 2020
South Africa should seek funding from the IMF due to high debt levels, big capital outflows and a potential recession due to the COVID-19 pandemic.
This is according to the Institute of International Finance (IIF) on Wednesday, who forecasts the South African economy to contract by 2.5% in 2020, but added that falling demand, travel curbs and coronavirus-related closures could lead to a deeper recession.
“We believe it is time for South Africa to turn to multilaterals for support” said the trade body, created by 38 groups in leading industrialised countries following the debt crisis in the early 1980s. It referred to the economic situation in South Africa as “increasingly untenable”, and joining a program with the IMF could “bring much-needed funding and help shore up investor confidence.”
South Africa was put on lockdown for 21 days on Friday, with people restricted to their homes and the majority of businesses closed. Over 1,300 cases of coronavirus have been reported and three fatalities.
Seeking funding from institutions, particularly the IMF, has been an unpopular decision with the government for some time, with such a move opposed by the radical faction of the ruling African National Congress and its large trade union allies, Reuters reports.
Furthermore, the government has shown hesitation in regard to seeking fiscal support from the IMF, due to the strict spending controls that would likely be implemented.
However, the Institute of International Finance said South Africa’s fiscal policy space was restricted before the coronavirus pandemic, complicated by ongoing low growth and increases to government debt.
Elevated borrowing costs and the need for increased social spending will potentially lead to a growth in fiscal deficits in future, which could hike government debt further.
The situation was complicated further still by the decision by Moody’s rating agency to reduce South Africa’s debt rating to below investment grade, which may lead to capital outflows of as much as $12 billion, according to the IIF.
The IIF added the downgrade would also lead to increasing financing costs and pile pressure on the rand.
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